New rules require transactions between associated persons to follow market-based pricing, with FBR outlining four methods for determining arm’s length results.

ISLAMABAD: The Federal Board of Revenue (FBR) has prescribed rules for determining arm’s length transactions between associated persons for Tax Year 2027, covering the period from July 1, 2026, to June 30, 2027.

The FBR issued the Income Tax Rules, 2002, updated up to September 15, 2026, outlining the requirements under Rule 23 for determining income arising from transactions between associates.

Under the arm’s length standard, the Commissioner Inland Revenue will determine income based on the principle that transactions between associated persons should reflect conditions comparable to those agreed between independent parties.

According to Rule 23, a controlled transaction meets the arm’s length standard if its outcome is consistent with what would have been achieved had independent parties conducted the same transaction under similar conditions.

The FBR has prescribed four methods for determining arm’s length results:

1. Comparable uncontrolled-price method.

2. Resale price method.

3. Cost plus method.

4. Profit split method.

The profit split method can only be applied when the comparable uncontrolled-price, resale price and cost plus methods cannot be reliably used.

Among the first three methods, the Commissioner will select the approach that provides the most reliable measure after considering all relevant facts and circumstances.

Where none of the prescribed methods can reliably establish an arm’s length result, the Commissioner may adopt another method, provided it remains consistent with the arm’s length standard.